How Wall Street destroyed work in America

The Myth of Finance
The myth of the financial sector goes something like this: only men and women equipped with the highest intelligence, the will to work death-defying hours and the most advanced technology can be entrusted with the sacred and mysterious task of ensuring the growth of the economy. Using complicated financial instruments, these elites (a) spread the risks involved in different ventures and (b) discipline firms to minimize costs—thus guaranteeing the best investments are extended sufficient credit. According to this myth, Wall Street is the economy’s private nutritionist, advising and assisting only the most motivated firms—and these fitter firms will provide jobs and pave the path to national prosperity. If the rest of us do not understand exactly why trading credit derivatives and commodity futures would achieve all this, this is because we are not as smart as the people working on Wall Street. Even Wall Street elites are happy to admit that they do not really know how the system works; such admissions only testify to the immensity of their noble task.

Many economists have tried to disabuse us of this myth. Twenty-five years before the recent financial crisis, Nobel Laureate James Tobin demonstrated that a very limited percent of the capital flow originating on Wall Street goes toward financing “real investments”—that is, investments in improving a firm’s production process. When large American corporations invest in new technology, they rely primarily on internal funds, not outside credit. The torrents of capital we see on Wall Street are devoted to a different purpose—speculation, gambling for capital gains. Finance’s second founding myth, that the stock market in particular is an “efficient” source for funding business ventures, simply doesn’t cohere with the history of American industrial development. When firms have needed to raise outside capital, they have generally issued debt—not stock. The stock market’s chief virtue has always been that it allows business elites to cash out of any enterprise by transferring ownership to other elites. Old owners then enjoy their new wealth, while new owners manage the same old corporation. The reality is that business elites promote the stock market far more than the stock market promotes economic growth.

Rather than foster growth, contemporary financial practices have primarily succeeded in exacerbating income inequality and creating singular forms of economic calamity. In the recent crisis, new instruments for expanding financial activity—justified at the time by reckless promises of universal homeownership—prompted a remarkable spiral of poverty, debt and downward mobility in America. The path from homeownership to homelessness, from apparent wealth and security to lack of basic shelter, is completely novel—as is the now steadily growing social group of “middle-class paupers.” (Ten percent of homeless people assisted by social service agencies last year lost their homes through bank foreclosures, according to the study “Foreclosure to Homelessness 2009.”) The homeless-through-foreclosure, having been persuaded by cheap credit to aspire to homeownership, were punished for unbefitting ambitions; any future pathway out of debt will be accompanied by new insecurities about the appropriateness of their life aspirations. Also novel in recent years is the extent to which economic “booms” no longer benefit average Americans. During the last economic “expansion” (between 2002 and 2007), fully two-thirds of all income gains flowed to the wealthiest one percent of the population. In 2007, the top 50 hedge and private equity managers averaged $588 million in annual compensation. On the other hand, the median income of ordinary Americans has dropped an average of $2,197 per year since 2000.
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